Nevertheless, advisors say that in some cases a variable annuity ends up being the best option for a portion of an investors' retirement money.
In simple terms, these annuities are a type of investment that offers some income-stream guarantees in retirement. You give an insurance company your money, either in a chunk or through regular contributions, and choose from a menu of underlying funds to invest in. Those funds generally are invested in stocks, bonds or a mix of the two, which means the value of your investment will fluctuate with the performance of those funds.
Some variable annuities are immediate and you begin getting payments right after you purchase the annuity. Others are deferred, in which case at some future date you can annuitize — meaning you agree to receive a periodic amount (typically monthly) — for a set time period or for the rest of your life.
Additionally, any gains on your account are tax-deferred until you make withdrawals, at which point you'll pay ordinary tax rates on the income.
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For some people the promise of an income guarantee can override the concern of higher costs. But even if you are one of those investors, advisors caution against putting more than a third or so of your retirement money in a variable annuity.
"If you put too much into it, you'll have a liquidity problem," said CFP Ed Vargo, founder of Burning River Advisory Group.
For starters, variable annuities operate under withdrawal rules similar to individual retirement accounts and 401(k) plans: In most cases a 10 percent federal tax penalty is slapped on withdrawals made before age 59½.
But even if you are beyond the age minimum, many variable annuities come with an initial surrender period. During this time — typically six to eight years — you'll pay a surrender charge if you withdraw more than a preset annual limit.
Those charges are typically steep, especially in the early years of owning the annuity. For example, an eight-year surrender period might come with an 8 percent surrender charge in the first year that gradually decreases before reaching 1 percent in its last year.